- 12 Marks
Question
Thunder Ltd resident in the USA has established an external company in Ghana as Thunder Ghana Ltd (Branch).
The following relates to the activities of Thunder Ghana Ltd (Branch) for 2021 year of assessment.
| Description | GH¢ |
|---|---|
| Sales | 1,200,000,000 |
| Cost of sales | (700,000,000) |
| Gross Profit | 500,000,000 |
| Add: Rental Income of Commercial Property (gross) | 100,000,000 |
| Add: Interest on Treasury bills (gross) | 50,000,000 |
| 650,000,000 | |
| Less operating expenses: | |
| Depreciation | 1,200,000 |
| Penalty | 600,000 |
| Sponsorship to shareholders’ children’s education | 100,000 |
| Interest on loan on capital project | 50,000 |
| Penalty imposed by Regulatory Authority | 290,000 |
| 647,760,000 |
Capital allowance agreed with the Ghana Revenue Authority amounted to GH¢1,700,700.
The management of Thunder Ltd has indicated its willingness to convert the company as an external company into a limited liability company.
Required:
i) Explain THREE (3) reasons why it is better to convert the branch into a limited liability company rather than operate as an external company. (3 marks)
ii) Compute the tax payable and branch profit tax. (7 marks)
iii) What is the tax implication if an external company converts into a limited liability company? (2 marks)
Answer
i) Reasons for Converting to a Limited Liability Company
- Branch profit tax: External companies are subject to a branch profit tax of 8%. Converting to a limited liability company eliminates this.
- Interest on loans: Loans from the parent company are treated as loans to oneself in the case of an external company and are non-deductible. Conversion resolves this.
- Legal autonomy: An external company cannot sue in its name; it is the parent company that sues. A limited liability company can sue and be sued in its own name.
(Any 3 points, 1 mark each = 3 marks)
ii) Tax Payable and Branch Profit Tax Computation
Thunder Ltd
Computation of Branch Profit Tax
Year of assessment 2021
Basis Period 1st January – December 31, 2021
iii) Tax Implications of Conversion
- The conversion of an external company to a limited liability company would require issuing shares as the stated capital or converting the head office investment into stated capital.
- Additionally, a stamp duty of 0.5% will be paid on the stated capital.
- Tags: Branch conversion, Branch profit tax, Corporate Tax, External company
- Level: Level 3
- Topic: International taxation
- Series: MAR 2023
- Uploader: Theophilus